The Stock Trader: How I Make a Living Trading Stocks

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The Stock Trader How I Make a Living Trading Stocks

Tony Oz

GOLDMAN BROWN BUSINESS MEDIA INC.

To My Wife Jodi, and My Son Jordan, You have made my life complete. I love you both.

Copyright © 2000 by Tony Oz. All rights reserved. Except as permitted under the United States Copyright Act of 1976, no part of this publication may be reproduced or distributed in any form or by any means, or stored in a data base or retrieval system, without the prior written permission of the publisher. Published by Goldman Brown Business Media Inc. 638 Lindero Cyn Rd. #145 Oak Park, CA 91377. ISBN 0-9679435-0-7 Printed in the United States of America.

Realtick"" is a trademark of Townsend Analytics, Ltd. © 1986-1999 Townsend Analytics, LLC. Used with permission. Any unauthorized reproduction, alteration or use of Realtick™ is strictly prohibited. Authorized use of RealTick™ by Tony Oz, and Goldman Brown Business Media Inc., does not constitute an endorsement by Townsend Analytics of "The Stock Trader: How I make a Living Trading Stocks" or any of Goldman Brown Business Media Inc. products or services. Townsend Analytics does not guarantee the accuracy of or warrant any representations made in "The Stock Trader: How I make a Living Trading Stocks" or the truth or accuracy of any information written, produced, or distributed by Goldman Brown Business Media Inc.

TABLE OF CONTENTS Foreword Introduction

ii iii

Chapter 1 The Challenge Trading Station Setup Choosing a Broker

I 3 4

Chapter? Setting the Rules Preparing for Day One Bar Charts Candlestick Charts Support and Resistance Changes in Supply and Demand Searching for Potential Trades Running Overnight Scans Tips and Guidelines

Chapter 3 Disclaimer This book is to be used for informational purposes only and without warranty of any kind. The materials and information in this book are not, and should not be construed as an offer to buy or sell any of the securities named in these materials. Trading of securities may not be suitable for all users of this information. Both day trading stocks and investing in (he stock market in general have large potential rewards. However, they both have large potential risks involved in which you can lose all your money. You, the reader, and not Tony Oz, or Goldman Brown Business Media Inc., are solely responsible for any losses, financial or otherwise, as a result of trading stocks. Under all circumstances, you the reader, and not Tony Oz, or Goldman Brown Business Media Inc., assume the entire cost and all risks involved with trading any stock based on strategies illustrated in this book. Past performance is not indicative of future results.

7 8 8 9 10 II II 12 12

Evaluation Risk/Reward Ratio The Final Candidates Chapter 4

17 18

Day One - The Early Warning Chapter 5

23

Day Two - FOMC Meeting Chapter6

27

Day Three - Working on My Golf Swing Chapter/

41

Day Four - The Running of the Bulls Chapters

51

Day Five - Oakland Here I Come ChapterQ

63

Day Six - Learning from Beginner Traders Chapter 10

71

Day Seven - When the Guru Speaks, We Should All Listen

79

Chapter 11 Chapter 25

Day Eight - The Market is Always Right

85

Chapter 12

Challenge Summary

Chapter 13

What Happened Next

Chapter 14 113

Chapter 15

127

141

165 175

Creating a Constant Watch List

247

Creating Baskets

249

Real-Time and Overnight Scans

251

Appendix E

177

Basics of Level II Quotes

253

Appendix F 187

Direct Access Order Routing and My Setup

255

Appendix G

Day Eighteen - Sweet Dream or a Nightmare Chapter 22

Advanced Features of MBTrader™

259

Appendix H

Day Nineteen - Traffic Jam Chapter 23 Day Twenty - Cash is a Position Chapter 24

243

Appendix D

Day Fifteen - Thank God It's Friday

Day Seventeen - Nasdaq Looking for Support Chapter 21

Plans, Records, Stats and More

Appendix C

Day Fourteen - Sitting Tight

Chapter 20

235

Appendix B

Day Thirteen - Technical Problems

Day Sixteen - After-Hours Trading

Tips, Guidelines, Rules and Case Studies Appendix A

Day Twelve - Record Volatility

Chapter 19

233

Bonus Pack

Day Eleven- Free Willy

Chapter 18

229

Epilogue

Day Ten - Silting on My Hands

Chapter 17

227

Chapter 26

Day Nine - Awakening the Bears

Chapter 16

The Secret to Success

221

Thank You, But No Champagne for me

225

Resources for the Active Trader

265

Glossary

267

Recommended Reading

277

Seminars and Workshops

279

Acknowledgements Many thanks to my wife Jodi and my son Jordan for making me smile everyday. I want to thank my dear friend Rick LaPoint who worked with me every day from the initial setup for the challenge through writing the last page of this book. I couldn't have done it without you. Special thanks to my graphic designers, jrp-graphics.com, Russell Paris, Julie Paris, and Bruce Carries. Photo on back cover taken by Annat Fink. I want to thank Rachel, Betty, Orry, Abraham, Carissa, Daliah, and the rest of the staff at Goldman Brown Business Media Inc. for your patience and great work ethics. I couldn't have chosen a better publisher. Thanks to Tim Bourquin and Jim Sugarman for your friendship and support. This book would have never happened if it wasn't for your challenge. Many thanks to my dear friends Steve Mocbius, Kevin Britko, Alex and Andrea Maimon, Lcn Cohen, Scott Webster, Jerry Rabenberg, Garbis, William Zhu, Richard V. Rueb, Chris Wheeler, Michael Turner, and Noriko Carries, you have all contributed to my success. Thanks to Townsend Analytics, Janice Kaylor, Danilo Torres, Mary Heim, Margaret Hafner, The BBC, and the crew at CNBC for all your help. Special thanks to Steve, Ross, Keith, Mark, Brian, Beth, Meg, Gail, Henry, Courtney, David, Phil, Jeramie, Shawn, John W, John G, Mat, Brenton, Kenny, Forest, and the rest of the crew at MB Trading. You have provided me with state-of-the-art customer support throughout the challenge. I feel that I owe so many professionals in the industry a debt of gratitude. I want to thank my colleagues and friends for their outstanding work in providing education for traders: Robert Dccl, Ken Calhoun, Oliver Velez, John Bollinger, John Murphy, Stan Kim, Dan Gibby, Gary Anderson, Mark Cook, Alan Farley, Rogan LaBier, Brandon Fredrcikson, Toni Hansen, Michael Williams, Eric Patterson, Ray Grant, David Nassar, Ted Tesser, the crew at tradingmarkets.com, and to all the ones I forgot, please forgive me. I want to thank two special ladies, Linda Raschke and Sunny Harris, who have greatly contributed to my personal success and to the success of numerous traders across the globe. You are an asset to the industry. Thanks to all the members of the Market Technicians Association. Thanks to all the members of Daytraders USA, and special thanks to all my students. You have inspired me to write this book for you.

Foreword I sat down at one of four monitors, still only half-awake while sipping my third cup of coffee since 3:30 am. The trading day starts early in California, and it took almost an hour to get here. But whenever a great trader invites me to watch them trade, I feel compelled to take full advantage of such a golden opportunity. Little did I know how extraordinary this experience would turn out to be. For his second Book, a follow-up to his instant classic, Stock Trading Wizard, Tony Oz wanted to show the world how he trades stocks for a living. And as I watched for the next four weeks, all of his trading activities were documented in a detailed trading diary. The idea was simple, and the formula classic. He would invite everyone to take an intimate look into his activities as he explains the strategies and processes behind his actions. It's a recipe that has worked for centuries, as Master entrusts to Apprentice a lifetime of knowledge and experience. After having received an exciting challenge from the founders of the International Online Trading Expo, Tim Bourquin and Jim Sugarman, Tony planned to hold nothing back, providing all the decisive details of each trade, including the thoughts, strategies, surprises, and problems, and how he dealt with the momentby-moment challenges the Market presented him. Such a book had never been attempted before. No trader has ever put their reputation on the line with this kind of honesty. It's easy to search through past trades and present the best ones. But no trader has come forth in advance with the candor to say, "For the next four weeks, I will reveal my every move, for better or worse, entries and exits, winners and losers, with all my profits and losses." Presented in these pages, 116 Round Trips are documented, including the charts, illustrations, and formulas. Tony explains the research and preparation; the joys and frustrations; the exhilarating victories and disappointing defeats. And of course, the blow-by-blow descriptions of each battle between Emotions, Decisions, Market Makers, and Technology. In this fascinating account, readers will quickly find themselves immersed in the action as Tony weaves his narrative. The chess game never lets up, as The Stock Trader matches his wits with the best the Market can throw at him. And by an astonishing coincidence of timing, trading for this book was in full swing during the Great Crash of April, 2000. When the devastation was complete

in

Introduction Online trading is taking on the world with lightning speed. It is one of the hottest, fastest growing businesses on the planet, and it has almost everyone wondering if they "have what it takes" to become a successful trader. Stock trading is even becoming a common topic of conversation in places where you would least expect it to be brought up, sucli as hair salons, delis, and even grocery stores. With the explosive growth of the Internet and the major changes occurring in the financial markets, this industry is not just today's "hot thing," but also an industry that is here to stay. Indeed, I truly believe (hat online trading in all its forms is only in its infancy. This industry will continue to grow and change to the point that what we know and practice today in the industry may seem like ancient history in as little as five years. How about one global exchange in which traders across multiple continents will trade stocks, options and futures for foreign and domestic companies? While this may sound like a far-fetched dream to some, and one that I'm sure floor traders in New York City with a vested interest in preserving the status quo will do everything in their power to prevent, it could soon become a reality. You just can't stop or fight the technological revolution that's occurring, at least not for long. This revolution has opened the doors to Wall Street and is granting anyone who wishes to participate in this business, a pass. This pass is, by no means, a free pass, as most speculators will soon learn; however, if you wish to take on the challenge and manage to survive the never-ending learning curve, you, too, can enjoy one of the most exciting jobs ever. And if you truly enjoy your new "job," you can make it your business and have the time of your life doing so. You may have noticed that I used the word job. I did so to make sure that you understand that trading stocks is work! In fact, this job is more time demanding than most people and the media can comprehend, or stock traders are willing to admit. Before I go on further, I feel that I should give you some background about myself. I will do so for the simple reason that it's important to know and trust where this information is coming from. No one will use and benefit from ideas and experience they don't have confidence in. Two centuries ago (at least it seems that long), I was a young kid who watched his uncles play the stock market. I had a great passion for what they were doing and wanted to learn all I could about the market. When I was asked what I wanted to do when I grew up, I would answer, "I want to be a iv v

stockbroker." This brings a big smile to my face today, knowing now that I would never want to be a stockbroker. But at the time, I thought it was the most prestigious job in the world. Why? Because I thought that a stockbroker was the closest person to the stock market. I had no idea back then that a stockbroker was really a salesmen - or that technology would afford me the opportunity to bypass brokers and trade on my own. Fast-forward now to rny freshman year in high school. I had a passion for two things: sports and stocks. Everyday, on my way to school, I would stop at Ihe grocery store and pick up a newspaper. If you asked rny classmates what I was doing on my breaks, they would have told you that I was either playing soccer or reading the financial section of the newspaper. I couldn't get enough of what was going on in the business world, and I was paper trading, or better said, paper investing in certain companies based on fundamental research. The next year, when I was a sophomore, I woke up one morning not feeling so well, and decided that skipping school was a good idea. But I had already exceeded the number of allowable sick days, and a note from my parents was not sufficient anymore. 1 needed a doctor's note. So, I made my way to the clinic and got the doctor's note I needed. On my way back home, I passed by a lottery stand. There was a big prize for the next drawing, so the large sign drew my attention. I walked towards the stand, and saw a soldier in uniform buying a lotto ticket. It was a scratch-off ticket, where you find out instantly if you win or lose. I watched the soldier scratch the ticket and win $3.00. The vendor asked the soldier if he wanted the $3.00 or if he wanted three more tickets. The soldier turned to me and asked, "What do you t h i n k I should do?" Without hesitation, I replied, "Take the money." The soldier took my advice, collected his money and left. There was an old man standing by the booth where this incident took place. He looked at me and said, . "Young man, why don't you take his luck?" I replied, "I don't think so. These type of lottery tickets are the biggest sucker game, and besides, I only have enough (o buy the other lottery ticket." The old man looked into my eyes and said, "Why don't you take his luck?" I can't exactly explain why I did it, but before I knew it, I reached in my pocket and bought the lottery ticket the old man suggested. I started scratching the ticket, and I won! I won the jackpot! $15,000 to be exact. I was so excited (hat I practically broke the world record for the 400-meter sprint. I ran home so fast I even lost the doctor's note in the process! I called my parents immediately, and they did not believe me. However, they quickly became believers when I surprised them with a $7,000 gift. The wonderful thing about winning this money was that I now had money to speculate with.

I wish I could say that I had it easy from that point on, but I didn't. I did manage to survive, and more importantly, I was learning valuable lessons. I was not an active stock trader. I was an investor and did well, but I desperately wanted to trade stocks for a living. The five years following the incident at the lotto stand were the typical years a teenager goes through, with my priorities changing everyday. Yet throughout this time, I continued investing. The only time I took out any money from my account was to buy my first car, and I actually missed the crash of 1987 as a result. Another fortuitous thing that happened on my road to becoming a career stock trader was that I met my future wife and moved in with her. She lived just five minutes away from where the Investor's Business Daily, The Daily Graphs and other William O'Neil publications were printed. I started going there on a daily basis and learned technical analysis from the pros. Living close was also a big advantage, because I would receive tomorrow's paper by 7:00 PM today, giving me all night to study it! From that point on, I have been committed to learning all there is to learn about stock trading. More importantly, I truly believed that I would be successful at it. I can't tell you how many new lessons I learned, each and every day. I had the basic knowledge needed to trade, but little actual trading experience. I could read the tape and find the plays, but when my money was on the line, I was a weak hand, and I would "give" my position away to the smart trader, without me capitalizing on the big opportunities presented to

me. Despite this, I kept good records of my trades, which allowed me to analyze them, so I could discover why I wasn't doing better. Analysis of my records showed me a pattern of mistakes I had been making over and over again. I knew that if I didn't correct these mistakes and learn from them, my future as a stock trader would not be very promising. I see now that keeping detailed trading records was the single greatest educational tool at my disposal, and I spent considerable time pouring over them, learning new lessons each time. My goal in this book is to let you "sit beside" me and watch trade after trade. Some are "textbook" in how well they come together, while others are very messy, and it seems everything goes wrong. But that is real life trading, and hopefully you will gain new insight from my experiences. This is my trading diary, and it is my hope that from this intimate look into my everyday activities, you too can learn as much from these records as I have.

You didn't need to look at her twice before you realized that Linda loves what she docs for a living, and (hat she is very proud of it. It was the pride and love for what she docs that made her presentation so dynamic and inspiring. It was high powered, like a drink from a fire hose.

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When (he fire department f i n a l l y put (he fire out and all the lights were turned off, I anxiously drove back home. I couldn't wait to get online and sludy charts. Something very interesting happened when I got home and did my research for the next morning. I started writing an outline'for a "how do you do it?" book. I wanted to answer the question I was asked in person every other weekend by members of Daytradcrs of Orange County, once and for all. The title of the book was StoclcJimkic: Advanced Short Term Trading Strategies. Once the writing was completed, we printed 98 unedited spiral-bound books. The reviews the book received were very positive, and the book was edited and published in hard cover under the title, Stock Trading Wizard, by my partners in August 1999. While my book was being printed, my dear friend, Tim Bourquin, took his original traders network idea to the next level as he extended his work effort, and together with Jim Sugannan, they co-founded the first ever International Online Trading Expo, which took place in Ontario California, September 1999. The theme of the Expo was education, and it turned out to be a great success. What I enjoyed the most from speaking (he Expo was the opportunity to sec, talk too, and teach traders who flew in from all over the world. It gave me (he feeling that day trading is here to stay, and I was proud to be one of many who shared a passion for the market. Following the success of the Expo, Tim and Jim scheduled another show to take place in New York, Fcb 18-20, 2000. I was invited to be a guest speaker and (each a t u t o r i a l about high probability trading. To make this tutorial special, I would walk the attendees through case studies of actual executed trades, from concept to completion. Two weeks before the Expo in New York, I met with Tim and Jim for lunch at a local Sushi bar. We were talking about the success of my book, Stock Trading [Vizard, and about my upcoming presentation. Tim and Jim also informed me that my tutorial was number one in pre-registration. We figured out that there was a lot of interest from traders to sec a recap of actual placed and executed trades, studied in detail. As I was stuffing my face with a spicy tuna roll, I noticed that Tim was cooking something up in his head. He had that serious look on his face. Then came a smile as he presented his idea. "I have a challenge for you," Tim said. "I want you to take your book,

Stock Trading Wizard, and show the world how you actually implement the strategies you featured in the book, in real life. This idea started an entire conversation where the three of us were brain storming. The result was that I was going to do something that had never been done before and would hopefully benefit many traders for years to cotne. Here is what I would have to do: I would start from scratch as if I was a beginner. I would research and select the right broker. I would open an account with $50,000 and follow all the money management and risk management rules outlined in the book. I would trade for a period of four weeks, starting on a date selected in advance. I would feature all trades — winners and losers — from concept to completion. The goal was for a reader to spend four weeks with me and learn how I trade stocks for a living. I really liked the idea and challenge Tim and Jim had for me. I felt it would be beneficial for anyone who considers trading stocks for a living to see how I do it. I accepted the challenge, and we decided that I would have the account ready and start the trading no later than the end of March.

Trading Station Setup Before I could get started, I needed another PC. I wanted to have a backup unit ready to ensure there would be no interruptions in case I ran into problems. I bought a new custom Pentium III with dual, 8 Megabyte graphic cards powering dual, 21" monitors; 256 megabytes of RAM; and miming Windows 98. My other computer was already running NT 4, with a DSL Internet connection, and my new PC was connected to the Internet via cable modem. I had to swap various graphic cards, cables, hubs and settings to get everything just right, because I naturally wanted my new PC to be my primary workstation. Beyond giving me an added degree of psychological comfort, all these backup precautions turned out to be very prudent, because at one time or another, the DSL went down, the cable feed went down, and a PC froze up. Not everyone may need such an elaborate setup for their own trading, but I cannot stress enough the importance of having backup systems in place for those occasions when disaster strikes. In a world so heavily dependent on technology, the unexpected seems to happen routinely. As it was, I ended up losing money or leaving some on the table due to technical problems. But I could

have gotten into bigger trouble had I not been able to quickly switch to a different computer or data feed. By the time everything was ready, I had two computers, four monitors, a printer, and a TV. Besides having CNBC running in the background, the television would indicate if the cable company was having problems, rather than the data feed or my PC. All in all, the furniture, lighting, deliveries, and various installations and setups set me a week behind schedule, which just shows how the best planning can still run into unanticipated" problems and setbacks.

Choosing a Broker This is probably the most important element of the setup procedure. I knew from past experience how important it is (o have my account with someone I can trust. Before I discuss the guidelines I followed to select the right broker, I feel I should explain how some online brokers make money. Have you ever seen the phrase "free commissions" or "$0.00 commission on market orders" used in promotional advertising? You probably have. In fact there arc companies out there that offer "Free Trading." How is that possible? How can they afford to pay for advertisement on TV if they work for free? The answer can be found if you read in between the lines. The first thing you will notice is that free commissions are offered for accounts with limited customer service activities. For example, all communications with the customer are via the Internet, exclusively (E-mail). They do not offer a telephone number or a physical location for customer service. All trades and customer service are only handled through the Internet. Do you know what happens if you bought a stock at S45.00 and it is falling down hard and you lose connection to the Internet? You arc toast my friend! There is no one to call to get you out of the trade! You can lose thousands, in this case. Here is the next catch. You will often read that the Market Makers and Specialists who execute trades may pay the brokerage firm for order flow. What is order flow? Simply put, the brokerage firm SELLS your order. These payments used to average as much as $9.00 per order. Why would a Market Maker or a Specialist pay $9.00 on average for your order? I am sure you guessed it by now; he would do so, because he plans to make a profit from it at your expense. How do you like your free commission now? I think it is important to understand that nothing is FREE. We always pay for it one way or another.

So, how can one go about selecting a broker to open an account with? I will use the process of elimination, just as if I was taking a multiple-choice test. First, I will eliminate all browser-based brokers, because there is no way I should wait more than six seconds, at the most, for confirmations on executions and cancellations on NASDAQ stocks. There is also no way I should click the refresh button again and again to get confirmations of pending trades and cancellations. That will cost me a lot of money in the long run. I want to see my orders and cancellations live, in real-time. Consequently, I require a stand-alone program. Next, I will eliminate all online brokers who do not offer direct access to all ECNs and Market Makers. Day traders who trade w i t h brokers who do not offer direct access are at an obvious disadvantage because their orders arc rerouted, ralher than placed directly with the buyer or seller. This means that they do not have direct access to the best possible prices to buy or sell a stock. I am amazed by how many day traders are trading with inferior platforms, robbing themselves of the best possible fills. I have narrowed down my selection to a few brokers who offer a stand-alone program and direct access to the market. Finally, I will take into consideration the brokerage firm's customer service and commission rates. I had a handful of final candidates whom I was going to interview at the upcoming Online Trading Expo in New York. I wanted to see the trading software they offered and get my in-person impression of the way they conduct business. After doing my homework and interviewing the different brokerage firms, I selected MB Trading to be my broker for the following reasons: 1. I found the software MB Trading uses, RcalTick 1M III, to be very powerful and user-friendly. I must disclose that I have been using this software in the past, so I felt very comfortable with it. This is, of course, a personal preference, but as you will see throughout this book, I am a technical trader who uses charts to help identify entry and exit points. Charts are visual, and the charts provided by RealTick™ III software were of high quality, and were brighter, clearer, and sharper than charts provided by other trading software. 2. MB Trading offered direct access to the market from 8:00 AM through 8:00 PM. An hour and a half before the official open, and four hours after the official close, via both the trading software and their trading desk. I can call and place a trade with a live person at

their trading desk anytime between 8:00-8:00 at no additional cost. 3. Slate of the art customer service, I couldn't say enough about the importance of reliable customer service. MB Trading has always prided itself on providing such service, and I was very impressed to find out that my calls were consistently picked up by the second or third ring.

Setting the Rules

u

4. Reduced commission: Wc at MB Trading understand that many clients are new to the RealTick™ III software and need some time to adjust to the different order routing system and wish to do so with fewer shares, MB Trading has created a special 60-day program available to all clients in which you may trade in lots of 300 shares or less for a reduced commission rate of five dollars - $5.00 per trade." I felt that MB Trading was giving new traders a better opportunity as they cut down Ihc slippage cost on smaller lot trades. 5. The most impressive thing about MB Trading was the testimonials. When I asked traders who use direct access software the question, "Whom do you trade with?" MB Trading was one of the most common answers, and when these traders were praising MB Trading's customer service, it made my decision a lot easier. Once I chose MB Trading to be my broker, I filled out a new account application and sent it in with a check for $300.00 for the data feed. My account was issued w i t h i n a couple of days, and I wired $50,000 into the account on 3/17/00. I was ready to make the first trade on Monday 3/20/00. The time frame for the challenge would be for the four weeks starting on Monday, 3/20/00 and ending on Friday, 4/14/00. I feel it is extremely important that I disclose t h a t I have never had an account with MB Trading prior to the above date. Consequently, it made the challenge very real. I was going to trade a new account with a new broker just as a beginner trader would.

The first rule has to do with risk management. When you manage risk, you always have to think of what would happen should something go wrong. Although this may seem like a pessimistic point of view, it is an essential element of proper risk management. We have set the following guidelines for money management and risk exposure for all trades that will take place in the following four weeks, Risk capital is set at $50,000. Margin may be used for a total buying power of $100,000. Maximum amount of money to be allocated to one stock position may not exceed $30,000 on the most aggressive position and should be around $25,000 for most stocks. This will ensure I will not put all the eggs in one basket. The exception to the rule will be index-tracking stocks such as SPY, QQQ and DIA. Since these stocks track a basket of 30 to 500 stocks, a single position in one of these stocks is already diversified. Consequently, the entire buying power of $100,000 may be allocated to such a position. I must take into account the volatility of certain stocks, and manage risk properly. I may use the entire buying power to hold positions overnight and be fully extended if I so choose, but I must have a very good reason for doing so. At the end of each week, all realized profits will be swept out of the account. If I have $800 in profits for the week, I will order a check for that amount and start the next week fresh with $50,000 in risk capital. If I have a losing week, I do not add money back into the account. I will work with the remaining capital until I get back over $50,000, in which case I will draw checks again. This will prevent me from losing a lot if I hit a slump. To keep things more challenging, I may not short sell stocks. This seemed a little odd to me at first, but the argument made was that many traders don't have access to an extensive short list or are trading accounts that are restricted from short selling. In order to not distort any of the performance, I will have to trade only one side of the market - the long side. I had no idea how much more challenging this rule was going to make things during the next four weeks.

Preparing for Day One Sunday, March 19,2000. My day begins when the market is closed. At some point between the close of llic market and the open on the following day, I will do my research. I normally like to do it at night. When I am finished with my research, 1 should have an idea as to what positions I want to be in during the next trading day. I w i l l take notes, write out trading plans, and go to sleep. I use technical analysis lo help me find potential stock trades for the next day. Technical analysis is used lo determine supply and demand for a stock based on price behavior over a certain period of time. There arc many patterns in which a stock has traded in the past that will help me forecast the potential future price movement for that stock. I try to keep things very simple and I only trade patterns that I understand. I w i l l use two types of charts to illustrate the setups that I will be trading over the next four weeks, bar charts and candlestick charts. Bar Charts Each bar shows four different price fields for any given day. These price fields include the opening price of the day, the high price of the day, the low price of (he day, and the closing price of the day.

Candlestick Charts Candlestick charts record the same data; however, it is somewhat easier to see the range between the opening price and the closing price for the time period the candle stick covers. Here are the differences between a white candle and a black candle.

A white candle means that the closing price was higher than the opening price. A black candle means that closing price was lower than the opening price. There are a few patterns, that 1 base most of my trading decisions on, which I found easy to understand and implement. Those patterns consist of the trend or overall price direction a stock is trading in, and support and resistance. I strongly believe that most complex patterns and indicators which will derive from certain mathematical calculations of price behaviors will try to confirm the obvious pattern. I learned that focusing on the simple pattern has been very profitable for me over the years.

Opening Price -This is the execution price of the first trade of the day. High - This is the highest price point that the stock traded at that day. Low - This is the lowest price the stock traded at that day. Closing Price-This is the price of the last trade of the day.

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9

Support and Resistance I will try and use a very simple example of how I look at support and resistance levels or liovv I implement (lie laws of supply and demand in my trading. I will use a hypothetical example to illustrate the idea of support and resistance. Let's say that at 9:30 AM, XYZ stock opened for trading at 43 1/2. The stock started trading clown, and at 10:30 AM the stock was at 41 1/2. The slock then started to trade higher and at 1:30 PM it was trading at 44 1/2. The stock then traded in a tight trading range between 44 to 44 1/2, and the last trade at 4:00 PM was at 44 1/8. Let's chart the data of the trading day for XYZ Stock.

reason XYZ share price did not go higher than 44 1/2 is simply because the quantity in supply was greater than the quantity in demand. The next question is, why was the quantity demanded higher than the quantity supplied at 41 1/2, and why was the quantity in supply greater than then the quantity in demand at 44 1/2? In other words, what determines supply and demand in the stock market? The reason (here was more quantity in demand at 41 1/2 is simply because investors' expectations were for the stock to go up in price. The reason there was more quantity in supply at 44 1/2 was because investors' expectations were for the stock to go down in price. In other words, supply and demand in the stock market is determined by investors' expectations. If we study the price behavior for XYZ slock in more depth, I can expect a few things to happen in the future based on what took place in the past. The first thing will be that if XYZ traded back clown to 41 1/2, buyers should step in and buy the stock. Next, if XYZ trades back up to 44 1/2, it will face some selling pressure. This easy to understand concept is the foundation of my trading system, and almost every setup I trade is based on this simple idea, that is to say, on changes in supply and demand. Changes in Supply and Demand

As you can sec, XYZ traded down from 43 1/2 to 41 1/2 where it found a bottom (support), then traded back up to 44 1/2 where it topped out (resistance). The question is, why? Why didn't XYZ go lower than 41 1/2. Why didn't it go higher than 44 1/2? The answer, of course, is found in the laws of supply and demand. The laws of supply and demand for any product or service are very simple. 1. If quantity demanded is greater than quantity in supply, prices will go up. 2. If quantity in supply is greater than quantity in demand, prices will go down. The reason XYZ share price did not go any lower than 41 1/2 is simply because the quantity in demand was greater than the quantity in supply. The 10

If XYZ would be able to trade at a higher price than 44 1/2, then it would suggest that investors' expectations have changed. If XYZ is able to trade at a lower price than 41 1/2, then it would suggest that investors' expectations have changed, as well. These changes in investors' expectations, or changes in supply and demand, for a slock are very common, and I would try lo capitalize and profit from these changes over the next four weeks. Searching for Potential Trades I have three main sources for potential trades. The first one is a watch list of 35 stocks that I follow on a daily basis. This list is my Constant watch list (although I do make changes to it once in a while). The second source is a scan I run after the market closes. This scan looks for different criteria and presents me with stocks that require further analysis. The third source is a scan I run during the trading day, which also looks for specific criteria to be met. Over the next four weeks, I will disclose how I found each and every trade prior to executing it. I will be covering methods of producing a Constant watch list in Appendix B. I will also be covering different scanning criteria, which you may use in your own trading, in Appendix D. 11

R u n n i n g the Overnight Scan The first scan I ran was for stocks that have pulled back in price over the last three days. I am looking for stocks that arc pulling back in price from their 52wcck high and are at or near support levels. The formula for the scan is: Oz Fullback Swing Trade VolAvg20 > 350,000 Last > P Low PI Close